International regime crisis or just a conflict of legal frameworks?

The international legal regime is facing a crisis, again. This is evident from numerous speeches (United Nations Secretary-General Kofi Annan speech)[1]conferences[2] and publications.[3] While these crises are due to multiple reasons, one of these is the lack of coherence and synchronisation in/of international economic relations.[4] In order to cope with transnational and supranational actors the modern landscape on international economic relations and norms has adopted new forms.

However, while these functionally specialized legal regimes may be highly efficient ways to pursue the economic goals they are intended for, over time they have also contributed to the resemblance of the tower of Babel for the economic international legal landscape. While these regimes may superficially share similar goals, the underlying policy rationale may substantially differ. Even their legal terminology may develop a very different scope and substantially different concepts on legitimacy. Thus, leading up to different legal dialects and lacking in overall coherence.

To demonstrate this lack of coherence this post focuses on the development, and eventual clash, of two parallel economic forms of policy in the context of international agreements. One is s (particularly foreign direct investment). The other is the European Union (EU) State aid regime, the legal framework which is constituted by EU primary and secondary legislation and guidelines with their implementation, application and enforcement measures.

Before we continue, it is important to understand that EU’s competition policy, of which State aid is a key component, has other objectives besides the common economy’s enhancement of global wealth. It also aims to support European governance and integration. This, naturally, creates tensions when these policies are to be implemented and applied both on a national and supranational level.

However, the slow convergence of the two regimes i.e. the regime for protection of international investments and EU State aid, with their independent origins built on trade theories for free market economic policy, has eventually led to a conflict due to their gradual expansion of scope. This conflict has both a procedural and substantial component. From the procedural perspective it is a conflict between the international investment tribunal’s investor-state arbitration process and the EU State aid procedure administered by the Commission and the European Court of Justice. The substantive component is on the principle of legitimate expectations, its interpretation and application, between the two.

While State aid law has a narrow scope of acceptance for undertaking expectations the Fair and Equitable Treatment (FET) clauses of investment treaties has an overly broad acceptance of the same.[5] On one hand, EU State aid law provides for its measures to pass procedural requirements for legitimization before any entitlement to protection derived from the principle of legitimate expectations can be enjoyed its recipient. On the other hand, this requirement for legitimacy has in practice been ignored by the international investment tribunals.

The outcome of these conflicts could have the effect of eroding the EU legal order’s autonomy, curtailing its capacity to regulate public policy. Also, due to its intra-state nature the conflict also has consequences for the relationship between EU Member states as well as between EU Member states and non-member states. The intra-EU consequence is that it catches the Member states between conflicting obligations. They have to decide whether to abide by EU State aid law or the terms of the international investment agreement with a breach of either resulting in possible sanctions, but not able to do both. Either choice would constitute a breach of the other legal framework.

When possible, the EU has addressed this by utilizing common ground for a solution, mainly through agreement on shared norms on the matter in regards to interpretation and scope (Free Trade Agreements (FTAs) and Preferential Trade agreements (PTAs)). When not possible the EU has unilaterally eliminated the threat to its autonomy by rejection of validity for bilateral investment agreements between Member states (intra-EU bilateral investment treaties (BITs)) that tries to expand their influence. In a similar vein the EU has also eliminated, from agreements between Member and non-member states (extra-EU BITs), any invasive substance impinging on the autonomy of EU’s legal order. There are also the plans to establish a Multilateral Investment Court (MIC).[6]

The EU has also successfully pressured its Member states into mutual termination of any intra-EU BITs, while also putting a process into place for replacing the Member states bilateral extra-EU BITs with EU’s own agreements. EU has also inserted State aid provisions to put a proportional and EU compatible, limitation on investment protection in their free and preferential trade agreements.

[1] United Nations Press Release, ‘‘Secretary-General names high-level panel to study global security and reform of the international system’’, New York, UN Office of Public Affairs, 4 November 2003.

[2] E.g. The 26th Annual Conference of the Australian and New Zealand Society of International Law in 2018.

[3] Multilateralism Under Challenge? Power, International Order, and Structural Change. Edited by Edward Newman, Ramesh Thakur and John Tirman.

[4] Which some scholars address as the fragmentation of international law Koskenniemi, M., & Leino, P. (2002). Fragmentation of international law? Postmodern anxieties. Leiden Journal of International Law, 15(3), 553-579; Benvenisti, E., & Downs, G. W. (2007). The empire’s new clothes: political economy and the fragmentation of international law. Stan. L. Rev., 60, 595; Bjorklund, A. K. (2007). Private rights and public international law: why competition among international economic law tribunals is not working. Hastings Law Journal, 59.

[5] Saavedra Pinto, C. (2016). The ‘Narrow’ Meaning of the Legitimate Expectations Principle in State Aid Law Versus the Foreign Investor’s Legitimate Expectations. European State Aid Law Quarterly, 15(2).

[6] In September 2017 the Commission initiated the possible creation of a Multilateral Investment Court (MIC) under the auspices of the United Nations Commission on International Trade Law (UNCITRAL) to work on multilateral reform of investor-state dispute settlement (ISDS) (European parliament website, A balanced and progressive trade policy to harness globalization at http://www.europarl.europa.eu/legislative-train/theme-a-balanced-and-progressive-trade-policy-to-harness-globalisation/file-multilateral-investment-court-(mic).

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